Quarterly Macro & Market Overview - April 2021 - Bajaj ...
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Quarterly Macro & Market Overview – April 2021
A second Covid wave been seen in India; Maharashtra worst hit
India- Daily New Covid Cases Trend Maharashtra- Daily New Covid Cases Trend
Source: Worldometers.info Source: Covid19india.org
• India is a seeing a second Covid wave, with Maharashtra state accounting for 50-55% of new cases & breaching the Sep 2020 peak by significant margin.
• In India, daily new cases have hit a record high (breaching the 1 lakh mark). However, mortality rate remains controlled at below 1.5% so far.
• Covid vaccination drive has progressed well, with India administering the third highest number of vaccine doses, behind the US & China. However, due to
its large population, vaccine coverage (as % of population) remains relatively lower than other countries.
2
Maharashtra has gone in for partial lockdown. Some other states also going in for restrictions /
partial lockdown.
India: State-wise GDP contribution in FY20 (in %)
• Maharashtra state has gone in for partial lock-down due to sharp escalation in Covid cases. The state has the highest contribution in India’s
GDP of ~14% in FY20.
• Some of the other states mentioned above are also seeing rise in Covid cases, although not to the same magnitude as that of Maharashtra.
Among these Tamil Nadu, Karnataka and Gujarat have a higher contribution in India’s GDP.
• We are seeing some partial lockdowns/restrictions in some other states, and further escalation may affect the pace of economic recovery.
3 Source: MOSPI, Nomura
Global economy to see healthy recovery in 2021; India amongst the fastest growing major economies
IMF GDP Growth Forecast (YoY in %) – April 2021 update
• As per IMF, global GDP growth to recover to +6.0% in CY21
from -3.3% contraction in CY20.
• Being helped by healthy economic recovery in developed
economies esp. the US. (+6.4% in CY21 vs -3.5% in CY20)
• India’s GDP growth to recover strongly to +12.5% in FY22 vs
-8.0% contraction in FY21.
• India amongst the fastest growing major economies
worldwide (helped to some extent by lower base effect).
• However, IMF mentioned there is downside risk to
estimates for India due to second Covid wave. RBI retained
GDP growth forecast at +10.5% for FY22.
4 Source: IMF World Economic Outlook, April 2021. For India 2020 = FY21 & 2021 = FY22
Major global central banks’ balance sheets have seen massive expansion
Central Bank Balance Sheet of Major Countries - Combined (US$ in billion)
• Major central banks (esp. US Fed & ECB) have gone for massive monetary stimulus, leading to a global liquidity surge—which has helped
in recovery in global equity markets & economy.
• Major central bank’s combined balance sheet expansion since the Covid pandemic has been the quickest on record, dwarfing the
expansion seen during Global Financial Crisis (GFC) of 2008-09.
5 Source: Bloomberg, Phillip CapitalMassive fiscal stimulus seen in various countries; US recently passed $1.9 trln Covid package
IMF – Fiscal Deficit Projections (% of GDP) US Household Savings (US$ in billion)
Source: IMF Fiscal Monitor Update, April 2021 Source: Bloomberg, Edelweiss Research
• Countries have gone in for record fiscal stimulus to deal with the Covid-19 pandemic, and this has supported the economic recovery.
• US has gone in for a record fiscal stimulus in 2020 & 2021. Recently in 2021 it passed a massive $1.9 trln stimulus on the back of Covid
stimulus package last year. Biden administration also announced a large infrastructure spending plan over 8-year period.
• US household savings has spiked due to the stimulus package & cheques provided by the government. Household savings have increased
in other countries as well; part of this could make its way into equities & other savings.
6Global bond yields have hardened this year; but easy monetary policy to continue
10 year bond yields of Various Countries
US Fed Meeting Projections – March 2021
Source: US Federal Reserve
Source: Bloomberg
• Global bond yields have hardened significantly in 2021 on the back of rising commodity prices (causing inflationary concerns) and a
strong revival in economic growth.
• However, major central banks continue to keep rates unchanged and maintain accommodative / easy monetary policy stance
➢ .US Fed has indicated it will keep interest rates unchanged through 2023, and that inflation going above 2% mark—will not cause it to raise rates.
➢ The ECB delivered a dovish policy in March and said that it would step up its bond purchases (QE)
7Most global markets have seen a strong rally over the past year
After a sharp correction in Feb-Mar 2020, most global
markets have seen a strong rally over the past year
➢ Rally helped by massive global monetary & fiscal
stimulus, strong economic recovery, ramp-up of
Covid vaccination.
➢ Indian markets among the top performers in FY21.
➢ Other Asian markets like South Korea, Taiwan &
Japan outperformed.
➢ Markets like Malaysia, UK, Hong Kong & China
underperformed relatively.
• Over the long term (7 & 10 years) Indian market has
outperformed most peer Emerging Markets
8World market cap to GDP is at its highest level at near 140%, indicating that global market
valuations are elevated
Source: Goldman Sachs
9Economic / Business Activity in India almost back to Pre-Covid levels; but more lock-downs could
impact pace of economic recovery
Nomura India Business Resumption index has moderated a bit Jefferies India Economic Activity index at ~100% of Pre-Covid level;
after touching ~95% of Pre-Covid level has moderated a bit recently
Source: Nomura, Jefferies
10High Frequency Indicators like auto sales point to strong recovery – in positive growth territory 11 Source: SIAM, IIFL Research
Other key indicators also pointing to strong recovery
Manufacturing & Services PMI in expansion territory, but moderates a bit GST collections hit record highs
Steel production has seen healthy recovery Cement production has moderated a bit after a healthy recovery
12 Source: IIFL Research, IHS MarkitCurrent account turns into deficit in Q3FY21; BoP remains in strong surplus
India Forex Reserves (US$ in billion)
Source: Nomura Source: Bloomberg, Macquarie
• India’s current account balance turned slightly negative after 3 months in Q3 FY21, due to higher trade deficit (caused by sharp jump in
imports). Current account expected to turn into deficit of 1% of GDP in FY22 from surplus of 0.9% of GDP in FY21
• Capital account in strong surplus in Q3 FY21 helped by healthy FDI & strong pick-up in FPI flows.
• BoP in healthy surplus in Q3 FY21 and the strong BoP position in FY21 has led to large accretion in FX reserves to record highs. BoP
expected to be in surplus in FY22 as well.
13Indian rupee has been amongst the top performing currencies over the past quarter
• Indian rupee has been amongst the top performing currencies
over the past quarter (3 months).
• Several currencies have seen significant depreciation against the
US Dollar over the past quarter.
• EM currencies like Turkish Lira & Brazilian Real have been amongst
the bottom performers.
• Over the past year (in FY21), rupee has appreciated against the
US dollar, but has been a relative underperformer compared to
other peer EM & Asian currencies.
• However, recently in April 2021 we have seen some depreciation
in the rupee.
14Record FPI equity inflows in FY21; while DIIs register record outflows
• On the back of strong global liquidity, record high FPI equity flows registered in FY21.
• However, DIIs registered record high net equity outflow in FY21, mainly due to outflows from mutual funds. In the month of March 2021,
DIIs registered the first month net inflow since Sep 2020.
15Market rally in India has been broad-based in FY21
• Equity markets rallied strongly in FY21, from March 2020 pandemic lows
➢ Mid/Small-caps outperformed significantly in FY21, making the rally
more broad-based
➢ Sectors like metals, auto, IT, realty, and capital goods outperformed
➢ Sectors like FMCG, oil & gas and PSU relatively underperformed
16Q2 & Q3 FY21 corporate earnings have been better than expectations; Corporate
earnings to see heathy recovery
Nifty EPS Trend Quarterly PAT growth trend of Nifty 50 index (% YoY)
Source: Motilal Oswal
Source: Bloomberg, Bajaj Allianz Life Insurance Estimates
• Q2 & Q3 FY21 corporate earnings have been above expectations (helped by cost controls)—resulting in earnings upgrades.
• We now expect Nifty EPS growth at ~21% for FY21 (compared to earlier estimate of lower single-digit growth), and Nifty EPS
growth to recover further to ~26% in FY22.
17Valuations are quite elevated; Market cap to GDP near its peak
Nifty Forward P/E Ratio has moderated a bit, but still elevated India Market Cap to GDP Trend (in %)
18 Source: Bloomberg, Jefferies, Motilal OswalBond yields hardened initially but soften later; RBI goes in for a dovish pause
• Bond yields hardened for most past of the quarter, but softened in
late March.
• Yields rose more in the medium term part of the yield curve (3-5 yrs).
• RBI kept rates unchanged in April policy, but gave dovish undertone
• Announced secondary market G-sec purchase programme (GSAP 1.0) of
Rs. 1 trln in Q1 FY22 for yield curve management.
• Lengthen the tenor of variable rate reverse repo auctions to manage the
liquidity and keep it stable.
• Extension of on-tap TLTRO by 6 months
• Additional liquidity support of Rs. 50,000 Cr for NABARD, SIDBI, NHB
India G-Sec Yield Curve Shift
• Yields softened further post the RBI April policy. RBI’s priority is to
support economic growth recovery.
• Also, keep borrowing cost in control to manage the large borrowing
programme in an efficient and non-disruptive manner.
• Central bank to retain accommodative stance till economic recovery
visible, while monitoring inflation trajectory.
19 Source: Bloomberg, Investing.comInflation has picked up a bit; liquidity remains in healthy surplus
India CPI Inflation trend Banking system Liquidity (Rs. In trillion)
Source: Bloomberg Source: Jefferies
• CPI inflation has picked up a bit in Feb 2021 after moderating from earlier highs; Core inflation (ex food & fuel) remains elevated.
• RBI broadly leaves inflation forecasts broadly unchanged in April 2021 policy review; Q4 FY22 forecast at 5.1%.
• Banking system liquidity in healthy surplus; may moderate a bit with lengthening of the tenor of variable rate rev repo auctions.
20Market Outlook
• Further escalation in Covid cases could lead to more lockdowns/restrictions, which may hamper
Second Covid wave in India pace of economic recovery in the short term & cause some market volatility.
• However, the expansion in vaccination drive may help to counter the spread.
Rising bond yields; but easy • Further rise in bond yields may cause some market volatility in the short term.
monetary policy • However, major central banks give dovish guidance; easy monetary policy to continue.
Corporate earnings better than • Corporate earnings seeing strong recovery & upgrades—21% & 26% Nifty EPS growth expected in
FY21 & FY22 respectively.
expected; but valuations elevated • Market valuations are elevated, but can moderate a bit if corporate earnings pan out as expected.
• Investors can continue to invest systematically. Any market correction/dips can be used to
Investment Strategy gradually increase equity allocation (as per individual risk profile).
• RBI to remain accommodative for some time to support economic growth.
Debt Markets & Strategy • We prefer medium term part of the G-Sec yield curve.
Economic recovery to continue; • India expected to be among the fastest growing major economies in FY22.
• With expansion of Covid vaccination drive, this will be the year of normalization, and set the
Year of normalization trajectory for future growth.
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